COLUMN-Do no harm: Protecting retirees in shaky pension plans

CHICAGO, June 26 We've all heard the physician's
Hippocratic oath: "First, do no harm." But there's a similar,
less-well-known principle in the world of pensions: First, do no
harm to retirees.

When pension programs are changed, it's almost unheard of to
cut benefits for retirees in their seventies, eighties or
beyond, who would have trouble adjusting to abrupt reductions in
income. The principle is a cornerstone of the Employee
Retirement Income Security Act (ERISA), which governs
private-sector pension plans.

It's also a guiding principle in other areas of retirement
policy. For example, when Social Security's retirement age was
raised in 1983, the changes were phased in over a 20-year period
- and the increases didn't start kicking in until 1990.

But all that could change soon.

Congress is expected to consider changes to ERISA later this
summer that could open the door to benefit cuts for current
retirees for the first time in recent memory. The cuts would hit
pensioners covered by multi-employer pension plans. These are
plans that are jointly funded by groups of employers in
industries like construction, trucking, mining and retail food
companies.

There were 1,369 active multi-employer plans in 2009,
according to the Pension Benefit Guarantee Corporation (PBGC),
the federally sponsored agency that backs up most private sector
pensions. At the market's nadir following the 2008 crash, 2.4
million retired participants were in plans considered
endangered, according to data provided to Reuters by PBGC. But
improving conditions probably have shrunk that number somewhat
since then.

HARD-HIT INDUSTRIES

The changes are being proposed by a coalition of business
and labor groups in response to a very real problem that is
going to be tough to solve. The reasons vary, but the culprits
include near-zero interest rates that have made it difficult for
pension plans to earn healthy returns on their assets.

And employment in some of the industries - like trucking and
construction - have been hard-hit by the economic downturn,
which has left them with a growing proportion of retirees to
current workers paying into the pensions funds.

If these plans go belly up, benefits would be paid by the
PBGC. But the level of PBGC protection for workers in
multi-employer plans is much lower than for single-employer
plans.

That's by design. Multi-employer plans historically have
been very stable, so policymakers set insurance premiums paid by
employers, along with benefits, at a much lower level than for
single employer plans. This year, multi-employer plans pay $12
per participant annually; single employer plans pay $42 per
head, plus a variable rate of $9 per $1,000 of underfunded
assets.

The maximum PBGC payout this year for a worker in a
single-employer plan (retiring at age 65) is $57,477. The
maximum PBGC benefit for the same worker in a multi-employer
plan is $12,870 - and many are receiving benefits three or four
times higher than that, which means they'd see very steep
benefit cuts if their plans become insolvent and PBGC steps in.

POSSIBLE SOLUTION

Meanwhile, the PBGC's multi-employer fund isn't sufficient
to cover the potential insolvencies. In 2012, its multi-employer
insurance fund had $7 billion in liabilities from plans that are
expected to become insolvent, but just $1.8 billion in assets.

The odds that Congress will bail out the funds look small.
So the National Coordinating Committee for Multiemployer Plans
(NCCMP), which includes plan sponsors and labor unions, convened
a commission with diverse representation that spent a year
hammering out a plan to address the problem.

Their plan is expected to be the foundation of legislation
amending ERISA, and it has a number of commendable
recommendations. For example, it would allow healthy plans to
consider adopting flexible new plan designs aimed at encouraging
them to continue their commitment to defined benefit (DB)
pensions.

That's a good thing, because the guaranteed income feature
of DB plans provides a much higher level of retirement security
than 401(k)s or IRAs, and they do it with a much higher degree
of efficiency because of the pooled risk among all participants
and professional money management.

The commission's plan would give trustees wide latitude to
cut benefits for current retirees, and that's very troubling.
But the plan promises to keep benefits slightly higher than PBGC
guarantees.

Some retirement policy advocates see that as a bridge too
far. "Congress should look to other alternatives before cutting
benefits for an 86-year-old old who is barely making it on his
current pension," says Karen Ferguson, director of the Pension
Rights Center, a non-profit advocacy group.

AVOIDING INSOLVENCY

The plan's advocates argue that including retiree cuts makes
more sense than letting the plans go into insolvency. "Doing
something now means retirees would take less of a hit down the
road, and active workers who are still contributing have
something to look forward to when they retire," says Randy
DeFrehn, NCCMP's executive director and co-author of the
commission report.

Critics want to explore other options. AARP, for example,
has argued for specific limits on cuts for retirees at advanced
ages, and with very low benefit levels. The nonprofit group,
which advocates for those 50 and older, also is pushing for
increased financial resources to help PBGC fund insolvent plans
- specifically, low-interest loans by the banks and investment
houses that played such a big role in the 2008 financial
meltdown.

Steps like that could help make sure we do no harm to our
most vulnerable seniors.

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